By Tom Bergin
LONDON (Reuters) - The amount of money Amazon.com Inc reports through a tax-exempt vehicle in Europe has dropped sharply in the past two years, even as European sales jumped, after the U.S. tax authority tightened rules it felt were being abused to shift profits.
This partnership then resells the software rights to other affiliates for a much higher price, corporate and court filings show.
Such arrangements have drawn fire from politicians on both sides of the Atlantic as well as citizens struggling with higher personal taxes and cutbacks in state services imposed to pay for the financial crisis.
The Group of 20 leading economies has vowed to crack down on corporate tax avoidance and the practice of shifting profits into low or no tax jurisdictions.
Amazon has been a frequent subject of politicians' criticism in Europe over the way it channels all European revenues to Luxembourg where profits can be earned tax free.
However, since 2012, when a dispute between the company and the UK tax authority was disclosed in court filings, the amount of profit reported by the group's Luxembourg-based tax-exempt partnership, Amazon Europe Holding Technologies SCS, has halved.
The company declined to comment on Friday but has previously said it follows the tax rules in all the countries where it operates.
The U.S. tax authority, the Internal Revenue Service (IRS) declined to comment, citing federal privacy rules that prohibit it from discussing individual taxpayers.
Most companies seek to pay no more tax than they have to because managers have a fiduciary duty to investors to maximize long-term profits.
Amazon and the IRS have been in dispute for years about Amazon Europe Holding. The unit pays U.S. affiliates to use existing software and shares the U.S. affiliates' cost of funding new technology, in return for the right to re-license this technology to affiliates in Europe.
According to a filing with the U.S. Tax Court in December 2012, the IRS has argued that Amazon Europe Holding should have paid much more to the U.S. affiliates, A9.com Inc and Amazon Technologies Inc., for the rights it received.
If Amazon Europe Holding had paid more, this would have increased Amazon group's U.S. taxable income. The IRS said Amazon Europe should have paid the U.S. arm an additional $110 million in cost-sharing payments in 2006 alone.
Amazon took a legal challenge against the IRS claims, saying its 2005-to-2011 payments were appropriate, the December 2012 court filing said.
Nonetheless, from 2012, Amazon Europe Holding increased the amount it paid its U.S. affiliates substantially.
In 2012, it paid them 408 million euros, up from 229 million euros in 2011. In 2013, it paid 420 million, accounts filed in Luxembourg this week showed.
Amazon declined to say why the payments had risen. Lawyers and accountants say the IRS has been tightening the rules covering inter-company cost-sharing agreements since December 2008.
Last year, it finalized new rules curtailing the discount rates companies could use when deciding the prices for inter-company cost-sharing deals.
"Amazon's decision is probably a result of negotiation with the IRS. I don't think that's something they would have chosen to do," said Richard Murphy, a tax adviser-turned-campaigner.
The higher payments mean profits at Amazon Europe Holding have fallen sharply, even as its income has risen.
Profits of 157 million euros last year were up from 118 million in 2012, but these results compare to profits of 302 million to 442 million between 2008 and 2011. No tax was paid on that income, accounts show.
Cost-sharing agreements are widely used by U.S. companies including Google and Microsoft. Yet the contracts are not published and deals usually involve subsidiaries in the Caribbean or Singapore, where companies are not obliged to file accounts.
Despite the higher payments its European operation is making to U.S. affiliates, Amazon's European business continues to thrive, with profit margins around 50 percent higher than at its U.S. operation.
Revenues at Amazon's three main European operating units were 15.8 billion euros last year, up 18 percent. This includes sales by Amazon EU Sarl, which retails books and consumer goods, Amazon Media EU Sarl, which sells music downloads and Amazon Services Europe Sarl which sells auction services to third-party retailers. All are based in Luxembourg.
The three companies declared profit of less than 53 million euros. They are liable to Luxembourg corporate income tax and had a combined charge of 11 million euros in 2013, accounts filed this week show.
By having these three units pay large fees to Amazon Europe Holding, which is tax exempt, Amazon minimizes its total tax bill.
Including Amazon Europe Holding, the main Luxembourg-based subsidiaries reported profits of 209 million euros, meaning a profit margin of 1.3 percent on European sales. The group's margin is 0.7 percent, according to Amazon's annual report.
The actual European result could even be slightly higher, as it excludes profits from subsidiaries across Europe, which have not yet filed accounts for 2013.
The main operating units in Britain, Germany and France reported combined profits of around 33 million euros in 2012.
The low profits at these subsidiaries which employ most of the staff and assets, reflect the fact they are funded by fees from the Luxembourg companies. These fees are just about enough to cover operating costs and report a small profit, which in turns means minimal taxes are due.
(Reporting by Tom Bergin; editing by Jason Neely)